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Direct Tax Alert - CBDT further clarifies a certain aspect of section 194R

19 September 2022


To effectively monitor and track the perquisites arising from business or profession and to widen the tax base, the Finance Act, 2022 inserted section 194R in the Income-tax Act, 1961 (IT Act) with effect from 1 July 2022. It casts the liability to withhold tax on benefits or other perquisites provided by one person to another at the rate of 10 percent of the value1 of said benefit or perquisite. The Central Board of Direct Taxes (CBDT) in order to remove the difficulties in the application of the said provision, issued a clarificatory Circular2 (please click here  to read our analysis) (first circular). However, owing to various practical difficulties in the implementation of the said provisions, the CBDT has issued another Circular3 (second circular) primarily clarifying certain aspects of the first circular.

We, at BDO in India, have analysed and summarized the said circular and provided our comments on its impact hereunder:

Reference of the second circular

Reference of the first circular

Matter under consideration



Q.3: Requirement to deduct tax in case the benefit or perquisite is in the form of an capital asset

Loan settlement/waiver of loan

At the time of waiving a loan/settlement of such loan, the banks, as well as specified institutions, would take a haircut; and the liability to withhold tax would impose an additional cost. Considering the said hardship, the CBDT has clarified that provisions of section 194R of the IT Act will not apply to such transactions. Thus, it is clarified that waiver of the loan will not be liable for tax withholding under section 194R of the IT Act if the following conditions are satisfied:

  • It is a one-time settlement with borrowers or waiver of loan granted on settling with borrowers
  • The lender is a specified entity4


CBDT has further stated that the clarification is only for the purpose of section 194R of the IT Act and it would not impact taxability in the hands of the beneficiary.


Q.7: Reimbursement of Out-of-Pocket Expenses ('OPE') incurred by a service provider in the course of rendering services

Applicability in a case where the expense incurred by a service provider is the cost of the service recipient and such cost is reimbursed by the service recipient and the bill is not in the name of the service recipient.

Where, under the GST Law, the service provider is a pure agent5 of the service recipient, the said reimbursements shall not trigger provisions of section 194R of the IT Act and would not be liable to tax withholding if the following conditions are satisfied:

  • The supplier acts as a pure agent of the recipient of the supply when he makes payment to the third party on authorization by such recipient
  • The payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the service recipient; and
  • The supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account,



Reimbursement of OPE - applicability of section 194R of the IT Act vis-a-vis other sections (e.g. 194C / 194J of the IT Act, etc.)

Circular 715 dated 8 August 1995, clarified that section 194C / 194J of the IT Act applies to ‘any sum paid. Accordingly, reimbursements are required to be considered for tax withholding under section 194C/194J of the IT Act. As the said payments are already covered under other provisions of the IT Act, it is clarified that such payment would not be covered by section 194R of the IT Act.


Q.8: Benefits / Perquisites with respect to Dealer Conferences

Should all dealers be invited?

It has been clarified by CBDT that inviting a few dealers would not trigger the provisions of section 194R of the IT Act if the underlying expense incurred for dealer conference is not in the nature of benefit/perquisite.


Expenses for stay before and after the conference

An expense incurred on overstay to the extent of one day immediately before the start of a conference or one day immediately after the end of the conference shall not trigger provisions of section 194R of the IT Act. However, for any additional stay, section 194R of the IT Act shall be applicable.


Identification of benefits against individual dealers in a group activity

CBDT has clarified that apportionment of benefits/perquisites provided should be done using a reasonable allocation key. In case the same is not possible and the provider of benefit/perquisite opts to disallow the expenditure incurred while computing total income, then provisions of section 194R of the IT Act shall not apply.


Q.9 – Deduction of tax in case benefits are paid in kind or partly in kind

Depreciation on motor car received as a gift

The recipient shall be eligible to claim depreciation on the motor car if:

  • the tax has been withheld on such gift; and
  • the same has been duly disclosed by the recipient in his tax return

The value as disclosed in the tax return shall be deemed to be the actual cost to claim depreciation.



Applicability of section 194R of the Act to Embassies / High Commissions

The provisions of Section 194R of the IT Act shall not apply to benefit/perquisite provided by the following organisations:

A. an organization in the scope of the United  Nations (Privileges and Immunity Act) 1947,

B. an International Organization whose income is exempt under a Specific Act of Parliament (such as the Asian Development Bank Act 1966), 

C. an embassy, a High Commission, legation, commission, consulate or the trade representation of a foreign state



Applicability of section 194R of the IT Act in case of Bonus / Rights issue

As such benefit/prerequisite does not result in a change in overall value as well as there is no change in ownership of the holding, it is clarified that section 194R of the IT Act shall not be attracted where bonus shares/rights shares are issued to all shareholders by a Company in which public are substantially interested.


BDO Comments

While the CBDT has brought in much-needed clarity at the opportune time, still certain areas are normal business transactions and not affected as benefit/perquisite, where clarification is required. Some of those areas are enlisted below:

  • Issuance of Bonus / Right shares by Private Companies
  • Waiver in the case of trade liability i.e., Bad debts
  • Loan waiver by entities other than the specified persons
  • Application of provisions of section 194R of the IT Act where the recipient is exempt from tax / is not required to pay tax
  • Bringing section 194R of the IT Act within the ambit of section 197 of the IT Act
  • Stock options provided to an independent consultant to the extent of services rendered – Value as on the date of allotment is higher than the value as on the date of grant

A clarification on the above aspects from CBDT would help a long way to the taxpayer in determining appropriate withholding tax liability and reducing unnecessary litigation at the lower levels.


1 Such provisions shall not apply where value of perquisite is less than INR 0.02 mn.

2 Circular No. 12/2022, dated 16 June 2022

3 Circular No. 18/2022, dated 13 September 2022

4 Public Financial Institution; Scheduled Bank; Cooperative bank (other than a primary agricultural credit society); Primary Co-operative Agricultural and Rural Development Bank; State Financial Corporation; Site Industrial Investment Corporation; Deposit taking NBFC; Systemically Important Non-deposit taking NBFC; Public company engaged in providing long term finance for construction or purchase of houses in India for residential purpose; and Asset Reconstruction Companies.

5 Under the GST Valuation Rules 2017, “pure agent” is defined to mean a person who

a.Enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;

b.Neither intends to hold nor holds any title to the goods or services or both, so procured or provided as pure agent of the recipient of supply;

c. Does not use for his own interest such goods or services so procured; and

d. Receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on this own account